HM Capital energy team spins out(2)

Two energy executives from HM Capital, Jason Downie and Edward Herring, have formed a new firm with the help of Landmark Partners that will manage existing energy investments.

HM Capital Partners’ energy team is spinning out with the help of Landmark Partners, which is financing the creation of a new $400 million vehicle to house two energy-related portfolio companies, according to a person with knowledge of the transaction.

The firm will be called Tailwater Capital and will be run by former HM Capital energy executives Jason Downie and Edward Herring, the person said. Limited partners in HM Capital’s 2006 Sector Performance Fund, which closed on $780 million in 2008, have the ability to roll over their interests into the new vehicle.

Downie, Herring and Landmark did not return requests for comment.

Jason
Downie

Tailwater will be an independent firm that will begin its life managing two portfolio companies; it’s not clear if it will seek to raise a standalone fund at some point. It’s also not clear which portfolio companies Tailwater will be managing. HM Capital lists three energy-related investments on its web site – Blackbrush Oil & Gas; SunTerra Oil & Gas and TexStar Midstream Services.

The energy spin-out would be the second transaction involving a spin-out of an HM Capital team. Earlier this year, Canada Pension Plan Investment Board completed a $606 million transaction to separate the firm’s food and consumer products team. The pension fund used $468 million to buy a portfolio of food-related companies from HM Capital, which will be managed by the newly-formed firm, called Kainos Capital.

Kainos is led by managing partner Andrew Rosen and partner Robert Sperry, both of whom specialised in the food and consumer products sector at HM Capital, and Sarah Bradley, who joined HM Capital in 2011 and also has food and consumer goods experience in her background.

As part of the transaction, CPPIB also committed $138 million to the Kainos fund, which has been targeting $400 million. Existing HM Capital LPs also had the option of rolling over their interests into the new vehicle, according to one source with knowledge of the deal.

HM Capital itself was a spin-out from the former Hicks Muse Tate & Furst, which was battered in the bursting of the tech bubble in the early 2000s and began winding down. Another firm, Lion Capital, emerged out of Hicks Muse, formed by the firm's former Europe team in 2005.

Restructuring of private equity funds (mostly older vintages) represents a large and growing opportunity for

Edward
Herring

secondary firms and other institutions. Just under $100 billion of net asset value resides in about 250 funds that are at least 10 year old, according to fund of funds Pantheon. Others have pegged the estimated value residing in older funds at around $75 billion. Within these funds, LPs increasingly are seeking liquidity options, or for ways to simply close out their exposure and get rid of the administrative burden these older funds represent.

Numerous secondary market sources have told Private Equity International in past interviews the raw potential for deals that help LPs and GPs resolve issues that come with aging funds will grow as the vehicles get older and the exit environment, especially for vintages from the mid-2000s, remains challenging.

However, the deals are complicated and are not necessarily easy to get done, as they require cooperation by LPs who may be asked to take a haircut on their remaining interests in the fund in exchange for a payout, or to roll over their interests into a new vehicle that will be managed by a GP investors are not happy with, sources said. It can be tough to find a middle ground in such situations, a source said, and so it’s not clear how much restructuring activity will actually take place.

“The market right now is very much in the first inning,” Larry Thuet, senior managing director and co-founder of Park Hill Group, told PEI in a past interview. Thuet, who runs Park Hill’s secondary practice, said: “It remains to be seen if there’s going to be a natural acceptance of this solution in the GP marketplace, not unlike there was a natural acceptance of doing a secondary in the GP/LP marketplace eight years ago.”